Will Telstra's proposal last the review?

Structural separation remains a sticking point for the telco.

By Malcolm Maiden

27 November 2008 — 12:00am

TELSTRA'S proposal to make a proposal to build a national broadband network appears to have avoided a telecommunications debacle, for eight weeks at least.

The question about whether Telstra has formally made a proposal with its 12-page letter outlining a plan to spend up to $5 billion alongside the Federal Government's $4.7 billion on an extension of the group's existing broadband pipes is a sideshow.

Telstra's conformance or non-conformance will be assessed by the Government's expert panel, which has eight weeks to make up its mind.

And while Telstra is proposing a roll-out that does not at this stage hit the Government's target of 98 per cent coverage, it is not automatically sidelined by that fact.

The Government specified 18 objectives for the national network, but they were objectives, not demands. And while Telstra's letter was dwarfed by the 1000-pager submitted by its rival Optus, it is likely that no submission immediately meets every objective.

Advertisement

It is likely for example that the final cost of any network that hits the 98 per cent mark will be higher than the one implied by the Government when it said it would outlay $4.7 billion for a 50 per cent share of the project.

The most important development yesterday was that Telstra squeezed past the midday deadline for proposals and stayed in the game.

The group is the natural builder of a broadband network, with the funding, technical expertise and commercial links in place to deliver what it promises, and it would have been a disaster if it was excluded, or excluded itself, before negotiations began.

Telstra might not get the job. Its offer is highly conditional, and there are three other national proposals, from Optus, from Melbourne-based Acacia (which is led by former Telstra executives including Doug Campbell and has consortium membership including Japan's Fujitsu group that is deeper than initially thought), and from Canadian telco Axia.

Rather than immediately targeting 98 per cent coverage, Telstra also proposes extending its existing broadband network to between 80 and 90 per cent of the population, 65 to 75 per cent of whom would have very high-speed access.

It would be a city-centric network, built to the budget set by the Government's $4.7 billion pledge. The unstated obverse, up for negotiation, is that it can be extended towards the 98 per cent target Communications Minister Stephen Conroy says remains in place — but only if more public funds are committed. Telstra believes 98 per cent coverage is a $20 billion-plus project.

Telstra also wants to own all of the new network, and apply the Government's $4.7 billion as debt funding, not equity as the Government originally intended.

And it still says that it cannot make a firm proposal until it is assured by the Government that it will get a commercial return, and will not be forcibly structurally separated from the new network.

Its new network would be open-access, with Telstra negotiating space at arm's length alongside its competitors, and there would be no restrictions on competitors building rival networks — something Telstra's competitors need to prevent Telstra creating a parallel pipe for its own telco traffic.

But it insists that the new network must be an integrated part of its entire operation, not run as a legally and structurally quarantined entity.

Structural separation is the toughest issue. If the Government agrees to Telstra owning, operating and integrating the new network, it will transfer the group's existing dominance of telecommunications into the new generation of fixed-line communications.

If it does not, the odds on Telstra remaining in the process beyond the eight-week review are slim.

Debt decided deal

RIO Tinto insiders were shocked by BHP Billiton's decision to walk away from its bid for the company, and were asking themselves yesterday if the deal could have been saved if they had agreed to negotiate in the final weeks.

The answer is no. Even if BHP and Rio had agreed on takeover terms, the European Commission was demanding major asset sales, and the market plunge had made those impossible to deliver in time at a reasonable price.

The same asset sale freeze had derailed Rio's attempt to sell $US10 billion ($A15.3 billion) of unwanted Alcan assets to reduce the $US40 billion debt it took on with the Alcan takeover, adding to the debt BHP would have inherited.

Asset sales might have been completed before the markets froze if Rio had accepted BHP's first merger of equals takeover offer 18 months ago. But it was a raging bull market when BHP first knocked on the door, and a nil-premium offer was always going to be rejected.

With the takeover premium stripped from its shares, Rio is exposed as carrying too much debt, and it is going to have to do something about it.

Rio chairman Paul Skinner said yesterday a share issue was not on the horizon and the group remained comfortable with its financial position.

The reality is Rio will do what it must to avoid making a share issue when its share price is still traumatised by BHP's decision to walk, and with its Alcan asset selldown on hold, capital expenditure will be the first casualty.

Longer-term prospects will go into the deep-freeze, and expansions of existing projects will be curtailed.

Announcements of cuts will underline the broad message behind BHP's withdrawal: the mining boom is over for the medium term, and it's time to batten the hatches.